Stories this week in the Wall Street Journal, the New York Times and the Washington Post focus on how Senator Chris Dodd’s new financial reform bill threatens the independence of the Federal Reserve. And Larry Kudlow took it up on his CNBC program. Loss of Federal Reserve independence is a serious problem, especially at this time of rapidly increasing Federal debt and a greatly expanded Federal Reserve balance sheet. But an important issue not touched on in these stories is that Fed actions during the crisis have themselves raised questions about its independence. After reviewing these actions in the new book The Road Ahead for the Fed, former Secretary of Treasury George Shultz writes:

“Observing this process, the question comes forcefully at you: Has the Accord gone down the drain? And remember how difficult it was for the Fed to disentangle itself from the Treasury in the post-World War II period.”

Secretary Shultz is referring to the 1951 Accord where the Federal Reserve regained its independence following the World War II peg of Treasury borrowing rates. So even without the Dodd bill the Fed has a lot of work to do to disentangle itself. For a broader summary see Tom Simpson’s recent review of this book which came out of a conference hosted at the Hoover Institution at Stanford Univeristy by John Ciorciari and me last March.